You are on page 1of 6

Chapter 8

Members rights
Chapter Summary

1 FRAUD ON THE MINORITY


In Gambotto the High Court considered whether:
a resolution passed by the majority to amend the companys constitution to
acquire compulsorily the shares of the minority was invalid;
a conflict of interest could arise following other amendments to the constitution
by the majority, not involving the compulsory acquisition of shares.

The High Court held that:


a compulsory acquisition of minority shares by the majority, or a compulsory
acquisition of valuable proprietary rights attaching to the shares, is valid if the
constitution included this power at the time of company registration; and
an amendment to the constitution to allow a compulsory acquisition by the
majority is valid if it is for a proper purpose and is it is not oppressive to the
minority; and
an amendment to the constitution resulting in a conflict of interest in these
circumstances is valid if it is not beyond any purpose contemplated by the
constitution and it is not oppressive to the minority

2 VARIATION OF CLASS RIGHTS


In a company with share capital, class rights refers to the rights attached to different
classes of shares. In a company without share capital, such as a company limited by
guarantee, class rights refers to the rights of members within a particular class.

2.1 Procedure to vary or cancel class rights


In a company with share capital, the procedure set out in the constitution (if any) to vary
or cancel the rights attached to shares in a particular class must be followed: s 246B(1)
(a). This procedure to vary or cancel rights cannot be changed unless the procedure itself
is followed. The requirements are similar for variations to the rights of members in
companies without share capital: s 246C(1)(b).

Section 246B(2) covers the situation where either a company does not have a constitution or
it has a constitution that does not address the issue of variation or cancellation of class rights.
S 246B(2) requires a special resolution passed by the company (that is, the shareholders of all
classes) in favour of varying or cancelling the rights attached to a particular class of shares. It
also requires either: that the shareholders in that class pass a special resolution in favour of
the variation or cancellation, or alternatively the written consent of shareholders with at least
75 per cent of the votes in that class. (Similar requirements, as set out above, apply to
companies without share capital).

The company must, within seven days, notify the members of the class affected by a
variation or cancellation of rights:
s 246B(3).

Chapter 8 1
2.2 Deemed variation of class rights
Section 246C deems certain actions to vary class rights. These are summarized in
textbook and slides.

2.3 Right to challenge


Under s 246D(1) members with at least 10 per cent of the votes in a class who do not
agree with a variation or cancellation may apply to the court to have the variation or
cancellation set aside. Such an application must be made within one month of the
variation, cancellation or modification: s 246D(2). Where an application is made, the
change takes effect when the application is either withdrawn or finally determined: s
246D(3)(b), and if no application is made, the change takes effect one month later: s
246D(3)(a). The court may only set the change aside if it is satisfied that the change
would unfairly prejudice the applicants: s 246D(5).

Where the variation, cancellation or modification has the unanimous support of the class,
the change takes effect on the date of the resolution or written consent; or on a later
date specified in the resolution or written consent: s 246E.

2.4 Lodgment of documents and resolutions with ASIC


A company which divides shares into different classes or converts shares into a different
class, must lodge the prescribed notice with ASIC within 14 days of the division or
conversion: ss 246F(1) and (2). If the company is a public company or a proprietary
company which has applied to become a public company, the company must also lodge
any agreement, consent or resolution that:
attaches rights to issued or unissued shares
varies or cancels rights attached to issued or unissued shares
varies or cancels rights of members in a class of members in a company without
share capital
binds a class of members.

3 OPPRESSION, UNFAIR PREJUDICE OR UNFAIR DISCRIMINATION


3.1 Section 232
Section 232 provides that the court may make an order under s 233 (see below) if:
(a) the conduct of a companys affairs; or
(b) an actual or proposed act or omission by or on behalf of a company; or
(c) a resolution, or a proposed resolution, of members or a class of members of a
company; is either:
(d) contrary to the interests of the members as a whole; or
(e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or
members whether in that
capacity or in any other capacity.

3.2 Court Orders


Under s 233(1) of the Corporations Act the court has considerable discretion regarding
the type of order that it can make. The order may include an order:
that the company be wound up (RE TIVOLI FREEHOLDS LTD (1972) VR 445 discusses
when this might be appropriate)
that the companys existing constitution be modified or repealed
regulating the conduct of the companys affairs in the future
for the purchase of any shares by any member or person to whom a share in the
company has been transmitted by will or by operation of law
for the purchase of shares with an appropriate reduction of the companys share
capital

Chapter 8 2
for the company to institute, prosecute, defend or discontinue specified
proceedings
authorising a member, or a person to whom a share in the company has been
transmitted by will or by operation of the law, to institute, prosecute, defend or
discontinue specified proceedings in the name and on behalf of the company
appointing a receiver or a receiver and manager of any or all of the companys
property
restraining a person from engaging in specified conduct or from doing a specified
act
requiring a person to do a specified act.

Section 234 provides that an application for a court order under s 233 may be made by
any of the following:
A member of the company - even if conduct relates to another capacity, or to
another member
A person who has been removed from the register of members because of a
selective reduction.
A person who has ceased to be a member of the company if the application
relates to the circumstances in which they ceased to be a member.
A person to whom a share in the company has been transmitted by will or by
operation of the law.
A person whom ASIC thinks appropriate, having regard to investigations it is
conducting or has conducted into the companys affairs or matters connected with
the company.

3.3 Objective test


An objective test is used to determine the scope of s 232. Directors who act in good faith
may still fall within s 232 if, according ordinary reasonable standards, they acted in an
unfairly prejudicial or discriminatory manner. This approach is illustrated below in the
High Court decision in Wayde v New South Wales Rugby League Ltd (1985) 3 ACLC 799.

The phrase conduct of a companys affairs therefore covers a wide range of potential
circumstances. In fact, any
matter that comes before the board of directors for consideration could be within the
scope of the affairs of a company: Re Cumberland Holdings Ltd (1974-1976) 1 ACLR 361
per Bowen CJ at 3745.

The case of MORGAN v 45 FLERS AVENUE PTY LTD (1986) 10 ACLR 692; (1986) 5 ACLC
222 considers whether a member of one company in a group of companies can
successfully seek an order for oppressive or unfair conduct in respect of conduct that has
occurred in another company in the group.

The case of RE CUMBERLAND HOLDINGS LTD (1974-1976) 1 ACLR 361 illustrates the
degree of self-interest required for the courts to order that the company be wound up.
The cases of SCOTTISH CO-OPERATIVE WHOLESALE SOCIETY LTD V MEYER [1959] AC
324; [1958] 3 ALL ER 66 and JOHN J STARR (REAL ESTATE) PTY LTD V ROBERT R ANDREW
(AASIA) PTY LTD (1991) 9 ACLC 1,372, (1991) 6 ACSR 63 and WAYDE V NEW SOUTH
WALES RUGBY LEAGUE LTD (1985) 180 CLR 459; (1985) 61 ALR 225; (1985) 10 ACLR 87;
(1985) 3 ACLC 799 provide further illustrations of what constitutes oppressive conduct.

4 LEGAL PROCEEDINGS ON BEHALF OF THE COMPANY


4.1 The common law position
In the case of Foss v Harbottle (1843) 67 ER 189, the court held that the company, not
shareholders, was the proper plaintiff for an an action against five directors of the

Chapter 8 3
company, alleging involvement in fraudulent land transactions causing loss to the
company.

Over time, courts recognised certain exceptions to the rule in Foss v Harbottle. For
example, the rule did not apply where the articles of association of a company required
the passing of a special resolution prior to the taking of certain action. Another exception
that developed in Australia was that minority shareholders could commence an action
against directors in their own right in the interests of justice.

There were three main problems with commencing a common law derivative action
under the exceptions to the rule in Foss v Harbottle:
ratification of the conduct of directors in question by a majority of shareholders at
a general meeting could deny minority shareholders any right of action against
the directors.
minority shareholders do not have access to company funds to finance legal
proceedings.
strict criteria must be established before a court would grant leave to minority
shareholders.

4.2 Common law versus statutory position


Section 236(3) has abolished the common law derivative action and replaced it with a
statutory remedy.

4.3 Standing to commence the action


Section 236(1) sets out who may commence an action.

A person cannot commence proceedings under s 236 of the Corporations Act without first
obtaining the leave of the court: s 237(1). In granting leave, the court must consider the
criteria set out in s 237(2). In this regard, section 237(3) provides for a rebuttable
presumption that granting leave is not in the best interests of the company in the
circumstances set out in s 237(3).

5 INSPECTION OF BOOKS
Part 2F.3 of the Corporations Act governs a members right to inspect the books of a
company (defined in section 9). It is a replaceable rule that the directors of a company,
or the company by resolution passed at a general meeting, may authorise a member to
inspect books of the company: s 247D.
The court has discretionary power to authorise the inspection of company books by
members and other persons: section 247A(1). For example, CZERWINSKI V SYRENA
ROYAL PTY LTD (NO 1) [2000] VSC 125; (2000) 18 ACLC 337; (2000) 34 ACSR 245.

6 PERSONAL RIGHTS
6.1 Introduction
A members personal right may arise through equitable principles, the Corporations Act
2001 or the statutory contract created under s 140(1). Where a members personal right
does arise, the member commences legal proceedings in their own name, not in the
name of the company. The action is not on behalf of the company but is in respect of the
personal right of the member.

6.2 Equitable principles


The personal rights of members under equitable principles include:

Chapter 8 4
the right to be protected against the improper dilution of voting rights (see the
case example below)
the right to receive proper notice of resolutions to be put to general meetings
the right to vote at meetings unless the companys constitution provides
otherwise.

6.3 Statutory contract


Section 140(1) creates a statutory contract, and provides that a companys constitution
(if any) and any replaceable rules that apply to the company have effect as a contract:
(a) between the company and each member; and
(b) between the company and each director and company secretary; and
(c) between a member and each other member;
under which each person agrees to observe and perform the constitution and rules so far
as they apply to that person.

7 RELATED PARTY TRANSACTIONS


7.1 Related parties and financial benefits
Chapter 2E applies to public companies only. If a public company gives a related party a
financial benefit, member approval must be obtained. Section 228(1) defines who is a
related party of the public company. Section 9 defines an entity. Control is defined in
section 50AA(1).

The giving of a financial benefit must be considered broadly from a commercial point of
view rather from a strictly legal point of view. Section 229(1)(a) of the Corporations Act
requires that a broad interpretation be given to determining whether a financial benefit is
given. Section 209 provides for civil or criminal penalties.

7.2 Member approval needed for related party benefit


Section 208(1) provides that a public company or an entity that the public company
controls cannot give a
financial benefit to a related party of the public company unless:
it obtains the approval of the public companys members in accordance with ss
217227 and gives the benefit within 15 months of the approval (or such later
time as defined in a contract approved by members which was entered into within
that time); or
the giving of the benefit falls within one of the exceptions set out in ss 210 to 216.

Contravention of s 208 does not affect the validity of any contract or transaction
connected with the giving of the benefit: s 209(1)(a) and the company / entity is not
guilty of an offence: s 209(1)(b). However, a person involved in a contravention of of s
208, contravenes s 209(2). This is a a civil penalty provision.

Under s 79, a person is involved in a contravention if, and only if, the person:
aided, abetted, counseled, procured or induced the contravention; or
was in any way, by act or omission, directly or indirectly, knowingly concerned in,
or party to, the contravention; or
conspired with others to effect the contravention.
7.3 Exceptions to the requirement for member approval
Section 210 provides that member approval is not needed to give a financial benefit on
terms that are no less favourable than the terms that would be reasonable if the dealing
were at arms length.

Chapter 8 5
Other exceptions to the requirement to obtain member approval include financial
benefits:
that are reasonable remuneration for an officer or employee who is a related party
(s 211(1))
that are payment of reasonable expenses of an officer or employee who is a
related party (s 211(2))
that are payment for indemnities, exemptions, insurance premiums or legal costs
incurred by an officer who is a related party (s 212)
to a director, their spouse or de facto spouse that do not exceed $2000 (s 213).

8 PROCEDURE FOR OBTAINING MEMBER APPROVAL


At least 14 days before giving notice of a meeting, to obtain member approval, the
company must lodge the text of the proposed resolution, the proposed explanatory
statement under s 219 and any other document that is to accompany the notice of the
meeting that is relevant to the member approval: s 218(1). Section 219(1) prescribes
what the explanatory notice sent to members must contain. Section 221 sets out the
requirements for the notice of the members meeting.

Sections 224 and 225 set out the voting requirements at the meeting. Within 14 days of
the passing of the resolution the company must lodge a copy of the resolution with ASIC:
s 226. Where there has been substantial compliance with the required procedure for
member approval the court may use discretion and declare that the provisions have been
substantially satisfied: s 227.

Chapter 8 6

You might also like